PERRITT CAPITAL GROWTH FUND
A no-load mutual fund that invests in a
portfolio of common stocks of smaller,
rapidly growing companies
ANNUAL REPORT
----------------
October 31, 1996
No Sales Charges
No Redemption Charges
No 12b-1 Fees
Minimum Initial Investment $1,000
IRA Minimum Initial Investment $250
Dividend Reinvestment Plan
Systematic Withdrawal Plan
Automatic Investment Plan
Retirement Plans Including:
IRA Keogh
SEP 403(b)
The Fund can also be purchased at the following brokerage firms:
Charles Schwab & Co., Jack White & Co. and Waterhouse Securities.
For assistance with your existing account, call our Shareholder
Service Center at: 1-800-332-3133
Board of Directors Independent Accountants
David Maglich Checkers, Simon & Rosner LLP
Gerald W. Perritt One South Wacker Drive
Dianne C. Click Chicago, IL 60606
Custodian, Transfer Agent and Investment Advisor
Dividend Disbursing Agent Perritt Capital Management
Firstar Trust Company 120 S. Riverside Plaza, #1745
PO Box 701 Chicago, IL 60606
Milwaukee, WI 53201-0701 (312) 669-1650
Legal Counsel This report is authorized for
Foley & Lardner distribution only to
777 East Wisconsin Avenue shareholders and others who
Milwaukee, WI 53202 have received a copy of the
prospectus of the Perritt
Capital Growth Fund, Inc.
Dear Fellow Shareholders:
So far, 1996 has been another banner year for the U.S. stock
market. During the 10 months ending October 31, 1996, the Standard
& Poor's 500 Index rose 14.5 percent, the NASDAQ Composite Index
rose 16.1 percent and the Wilshire 5000 Index appreciated by 13.1
percent. Although small firm stocks participated in the stock
market's rally, the Russell 2000 Index only rose 7.8 percent.
As measured by changes in the S&P 500 Index, the U.S. stock market
has now risen for six consecutive years without experiencing a
correction of 10 percent or more. That's the longest uninterrupted
stock market advance ever. The U.S. economy continues to grow at
a sustainable rate, the inflation environment is benign, interest
rates are declining, and individual investors are pouring billions
of dollars into mutual funds every month (with greater percentages
directed toward equity mutual funds). This rosy scenario has led
come people to conclude that "it's different this time." However,
at least in the large capitalization sector of the market, price-earnings
multiples are relatively high and dividend yields are at
their lowest level ever. Thus, it would be a big mistake to
believe that the current bull market can go on forever. In fact,
without a substantial increase in corporate earnings during the
next 12 months, stock prices may have little room to move
significantly higher next year. Thus, investors need to assess
their risk tolerance levels and adjust their portfolios
accordingly.
During the past 12 months (ending October 31, 1996), your Fund
returned 18.6 percent versus a 15.0 percent increase in the Russell
2000 Index, a measure of small firm stock performance, This is the
third consecutive fiscal year that the Perritt Capital Growth Fund
has returned more than the Russell 2000 Index. A number of our
holdings appreciated. Below is a list of the ten stocks with the
largest price increase during the last 12 months:
Percentage
Company Price Change
Zitel 212.2%
TRO Learning 125.4
Worthington Foods 119.5
AEP Industries 113.9
Pomeroy Computer Resources 93.8
Barra Inc. 89.8
Computer Products 69.9
Tridex 58.7
IKOS Systems 52.1
St. Mary land & Exploration 51.4
As fiscal year-end, the Fund was invested in the common stocks of
54 companies. Approximately 28 percent of the Fund's assets were
invested in so-called "high-tech" industries such as electronics,
telecommunications, and computer software. These 54 stocks possess
an average market capitalization (shares outstanding times current
share price) of $124 million. The Fund continues to follow a
value-oriented investment strategy. On average, the portfolio's
stocks were trading at 15 times trailing 12-month earnings and
slightly more than 12 times 1997 per share earnings estimates.
Although the future is never certain, we are optimistic about the
prospects for small-cap stocks for the year-ahead. Industry
analysts expect small-cap earnings to grow at twice the rate of
large-caps during the next 12 months. Even so, the average year-ahead
price-earnings multiples in the small sector of the market is
about equal to that of the large-cap-dominated S&P 500 Index. A
favorable interest rate and inflation environment, coupled with a
continuation of expansion in the domestic economy at a sustainable
level all bode well for small-cap stocks.
Portfolio Managers: The Fund has been directed since inception by
Dr. Gerald W. Perritt. Dr. Perritt received a doctorate in finance
and economics from the University of Kentucky. He has taught
investments and finance at a number of colleges and universities
including: Babson College, the University of Miami, Florida
International University, Ball State University, and DePaul
University (Chicago). Dr. Perritt has authored several books on
investing, including Small Stocks: Big Profits and Mutual Funds
Made Easy. Dr. Perritt is assisted by Michael Corbett, a 1989
graduate of DePaul University.
PERFORMANCE Perritt Capital Versus Russell 2000
Growth Fund Small Cap Index
--------------- ---------------
1988 $10,220 $ 9,184
1989 10,604 10,445
1990 8,369 7,412
1991 11,722 11,537
1992 11,921 12,406
1993 13,467 16,165
1994 13,326 15,906
1995 16,738 18,478
1996 19,843 21,242
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change, or the growth of a hypothetical $10,000
investment. Each performance figure includes changes in a fund's
share price, plus any reinvestment of any dividends (income) and
capital gains (profits the fund earns when is sells stocks that
have grown in value).
Cumulative Total Returns - Periods ended October 31, 1996
Past 1 yr Past 3 yrs Past 5 yrs Fund Life
Perritt Capital Growth 18.56% 47.35% 69.29% 98.43%
Russlle 2000 Index 14.96% 31.40% 84.12% 112.42%
S&P 500 Index 21.28% 50.75% 79.70% 161.06%
CPI* 3.01% 8.45% 15.21% 35.65%
Cumulative total returns reflect the Fund's actual performance over
a set period - in this case, since the Fund began on April 11,
1988. For example, if you invested $1,000 in a fund that had a 5%
return over one year, you would end up with $1,050. You can
compare the Fund's returns to the S&P 500 - a common proxy for the
U.S. stock market. You can also compare them to the Russell 2000,
which currently reflects the smallest 2000 companies in the U.S.
stock market. Both benchmarks include reinvested dividends and
capital gains, if any, and exclude the effect of sales charges.
Comparing the Fund's performance to the consumer price index helps
show how your investment did compared to inflation*.
Average Annual Total Return - Periods ended October 31, 1996
Past 1 yr Past 3 yrs Past 5 yrs Fund Life
Perritt Capital Growth 18.56% 13.79% 11.10% 8.33%
Russe11 2000 Index 14.96% 9.53% 12.99% 9.20%
S&P 500 Index 21.28% 14.66% 12.44% 11.86%
CPI* 3.01% 2.73% 2.87% 3.63%
Average annual total returns take the Fund's actual (or cumulative)
returns and show you what would have happened if the Fund had
performed at a constant rate each year. Total returns and yields
are based on past results and are not an indication of future
performance.
STATEMENT OF NET ASSETS
October 31, 1996
Shares Market Value
- ------ ------------
COMMON STOCKS - 97.2% (a)
Building Materials - 1.3%
5,800 Central Sprinkler* $102,950
Business Service - 10.8%
10,300 LCS Industries 135,187
8,600 McGrath Rentcorp 204,250
18,000 Pomeroy Computer Resources* 418,500
10,000 Warrantech Corp* 122,500
--------
880,437
Capital Goods - 6.6%
4,500 Lindsay Manufacturing 193,500
9,600 MTS Systems 192,000
10,800 Versa Tech 148,500
--------
534,000
Chemicals and Related Products - 4.1%
5,000 AEP Industries* 240,625
12,300 Environmental Technology* 89,175
--------
329,800
Consumer Product - Distributing - 5.0%
6,800 Guest Supply* 100,300
11,475 Hirsh International* 206,550
15,000 TBC, Inc.* 99,375
--------
406,225
Consumer Product - Manufacturing - 10.1%
7,200 Boston Acoustics 140,400
10,100 Boyds Wheel* 140,137
14,600 Craftmade International 97,409
6,100 Custom Chrome* 115,138
8,100 Sport Haley* 116,438
7,500 Stephen 88,125
8,200 Tranzonic 126,075
--------
823,722
STATEMENT OF NET ASSETS (continued)
Shares Market Value
- ------ ------------
Electronics and Semi-Conductor Equipment - 17.4%
17,100 Asante Technology* 97.256
8,200 Asyst Technologies* 135,300
10,000 Cohu 165,000
10,000 Computer Products* 197,500
8,100 General Scanning* 82,013
10,000 Ikos Systems* 178,750
6,300 STM Wireless* 53,550
16,000 Tridex* 200,000
8,000 Woodhead 110,000
5,000 Zitel* 191,250
--------
1,410,619
Energy - 5.4%
12,000 American Oilfield Divers* 139,500
16,500 Dawson Geophysical* 144,375
7,700 St. Mary Land & Exploration 155,925
--------
439,800
Food - 2.2%
8,100 Worthington Foods 182,250
Hospital Supplies & Services - 2.9%
6,100 RehabCare Group* 109,037
10,200 Utah Medical* 130,050
--------
239,087
Housing - 4.4%
7,100 Belmont Homes* 173,950
12,075 Nobility Homes* 181,125
--------
355,075
Leisure - 6.0%
20,100 Aldila* 80,400
12,000 Casino America* 58,500
10,000 Coastcast* 182,500
20,000 NTN Communications* 78,750
8,000 Shuffle Master* 89,000
--------
489,150
Military Equipment - 2.3%
19,100 Engineering Support 183,838
STATEMENT OF NET ASSETS (continued)
Shares Market Value
- ------ ------------
Minerals & Resources - 4.5%
5,000 Florida Rock 155,000
14,400 Green (A.P.) Industries 147,600
20,000 Recycling Industies* 61,250
--------
363,850
Retail - 2.0%
10,400 Republic Automotive Parts* 171,600
Software - 6.7%
8,700 Barra* 243,464
10,850 Casino Data Systems* 155,969
10,300 Cornerstone Imaging* 84,975
10,000 Rainbow Technologies* 178,750
13,500 TRO Learning* 239,625
--------
902,783
Transportation - 1.0%
10,000 Frozen Food Express 87,500
--------
Total Common Stocks (Cost $6,258,654) 7,902,686
----------
DEMAND NOTES - 1.8% (a)
21,447 American Family 5.02% due 05/06/97 21,447
28,517 Johnson Controls 5.04% due 03/03/97 28,517
1,769 Pitney Bowes 5.02% due 01/31/97 1,769
95,288 Wisconsin Electric 5.06% due 02/14/97 95,288
----------
Total Demand Notes (Cost $147,021) 147,021
----------
Total Investments (Cost $6,405,675) 8,049,707
----------
Cash and Receivables Net of
Liabilities - 1.0% (a) 79,880
----------
TOTAL NET ASSETS - 100%
(Equivalent to $14.33 per share
based on 567,510 shares of $8,129,587
capital stocks outstanding.) ==========
*Non-income producing security.
(a) Percentages for various classifications relate to total
net assets.
The accompanying notes to financial statements are an integral
part of this statement.
STATEMENT OF CHANGES IN NET ASSETS
For the For the
Year Ended Year Ended
OPERATIONS: October 31, 1996 October 31, 1995
---------------- ----------------
Net investment loss................... $ (88,318) $ (63,148)
Net realized gain on investments...... 835,018 1,086,825
Net increase in unrealized
appreciation of investments......... 554,632 403,904
Increase in net assets resulting ----------- -----------
from from operations................ 1,301,332 1,427,581
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment
income.............................. (439,517) ---
Distributions from net realized gains
from investment transactions........ (584,161) (309,908)
Decrease in net assets resulting from ----------- -----------
distributions....................... (1,023,678) (309,908)
CAPITAL SHARE TRANSACTIONS:
-------------------------
Proceeds from shares issued (115,983
and 26,436 shares, respectively..... 1,545,853 326,407
Cost of shares redeemed (104,320 and
106,727 shares, respectively........ (1,412,290) (1,294,217)
Reinvested dividends (80,986 and
27,070 shares, respectively)........ 989,644 299,665
Increase (decrease) in net assets ----------- -----------
derived from capital share
transactions........................ 1,123,207 (668,145)
----------- -----------
Total Increase ....................... 1,400,861 449,528
NET ASSETS AT THE BEGINNING
OF THE PERIOD....................... 6,728,726 6,279,198
----------- -----------
NET ASSETS AT THE END OF THE PERIOD
(Including undistributed net
investment loss of ($322,972) and
($297,802, respectively)........... $8,129,587 $6,728,726
===========================
The accompanying notes to financial statements are
an integral part of this statement.
FINANCIAL HIGHLIGHTS
Years ended October 31
1996 1995 1994 1993 1992
Selected Per-Share Data
Net asset value,
beginning of period......... $14.17 $11.89 $12.54 $11.43 $11.36
------ ------ ------- ------ -------
Net investment income (loss) (0.16) (0.13) (0.13) (0.14) (0.12)
Net realized and unrealized
gain on investments......... 2.42 3.01 0.02 1.61 0.31
------ ------ ------- ------ -------
Total from Investment
Operations.................. 2.26 2.88 (0.11) 1.47 0.19
------ ------ ------- ------ -------
Less Distributions:
From net investment income (0.90) - - (0.08) -
From net realized gains... (1.20) (0.60) (0.54) (0.28) (0.12)
------ ------ ------- ------ -------
Total Distributions....... (2.10) (0.60) (0.54) (0.36) (0.12)
------ ------ ------- ------ -------
Net asset value,
end of period............... $14.33 $14.17 $11.89 $12.54 $11.43
====== ====== ====== ====== ======
Total Return................ 18.56% 25.60% (1.05%) 12.97% 1.70%
Ratios and Supplemental Data
Net assets, end of period
(in thousands).............. $8,130 $6,729 $6,279 $7,208 $6,942
Ratio of expenses to
average net assets.......... 1.92% 2.07% 2.00% 1.96% 2.31%
Ratio of net investment income
to average net assets....... (1.2%) (1.0%) (1.0%) (1.1%) (1.1%)
Portfolio turnover rate 58.0% 67.4% 39.2% 34.6% 24.4%
Average Commission Rate per
equity stock traded......... 3.6315%
The accompanying notes to financial statements are
an integral part of this statement.
STATEMENT OF OPERATIONS
For the
Year ended
October 31, 1996
INCOME:
Dividend............................. $39,051
Interest............................. 19,034
-------
Total income......................... 58,085
-------
EXPENSES:
Management fees...................... 53,327
Legal fees........................... 4,326
Administrative services.............. 22,182
Transfer agent fees.................. 20,461
Registration fees.................... 18,822
Printing and postage................. 4,833
Custodian fees....................... 7,463
Auditing............................. 10,000
Directors and annual meeting......... 1,683
Insurance............................ 1,806
Other expenses....................... 500
-------
Total expenses 146,403
-------
Net investment loss (88,318)
-------
NET REALIZED GAIN ON INVESTMENTS............. 835,018
NET INCREASE IN UNREALIZED APPRECIATION
OF INVESTMENTS............................ 554,632
---------
NET GAIN ON INVESTMENTS...................... 1,389,650
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS...........................$1,301,332
==========
The accompanying notes to financial statements are
an integral part of this statement.
NOTES TO FINANCIAL STATEMENTS
October 31, 1996
The Perritt Capital Growth Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end
investment company.
1. Summary of Significant Accounting Policies - The following is
a summary of significant accounting policies of the Fund:
a. Each security, excluding demand notes, is valued at the
last sale price reported by the principal security exchange
on which the issue is traded, or if no sale is reported,
the mean between the latest bid and ask price. Securities
which are traded over-the-counter are valued at the mean
between the latest bid and ask price if no sale was
effected. Demand notes are valued at cost which
approximates quoted market value. Investment transactions
are recorded no later than the first business day after the
trade date. Cost amounts, as reported on the statement of
net assets, are the same for federal income tax purposes.
For the year ended October 31, 1996, purchases and sales of
investment securities (excluding demand notes) were
$4,417,505 and $4,540,580 respectively.
b. Net realized gains and losses on securities were computed
using first-in , first-out basis.
c. Provision has not been made for federal income tax since
the Fund has elected to be taxed as a "regulated investment
company" and intends to distribute substantially all income
to its shareholders and otherwise comply with the
provisions of the Internal Revenue Code applicable to
regulated investment companies. The Fund will distribute
approximately $21,777 as ordinary income dividend
distributions and $724,922 as capital gain dividend
distributions.
d. Dividends to shareholders are recorded on the ex-dividend
date.
e. Dividend income is recognized on the ex-dividend date, and
interest income is recognized on the accrual basis.
Discounts and premiums on securities purchased are
amortized over the life of the respective securities.
f. The process of preparing a statement of financial condition
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the statement of financial condition and reported amounts
of revenue and expenses during the reporting period. Actual
results could differ from those estimaes.
NOTES TO FINANCIAL STATEMENTS (continued)
October 31, 1996
g. Substantially all of the Fund's assets and liabilities are
considered financial instruments as defined by Statement of
Financial Accounting Standards No. 107 and are either
already
reflected at fair values or are short-term or replacable on
demand. Therefore, their carrying amounts approximate their
fair values.
2. Investment Advisor and Management Agreement and Transactions
With Related Parties -
The Fund has a management agreement with Perritt Capital
Management, Inc. ("PCM) (formerly Perritt Investments, Inc.),
with whom certain officers of the Fund are affiliated, to serve
as investment advisor and manager. Under the terms of the
agreement, the Fund will pay PCM a monthly management fee at
the
annual rate of 0.7% of the daily net assets of the Fund.
This agreement requires the advisor to reimburse the Fund in
the event that the expenses of the Fund in any fiscal year
exceed that percentage of the average net asset value of the
Fund which is the most restrictive percentage provided by the
state laws of the various states in which the Fund's common
stock is qualified for sale. The most restrictive percentage
limitation (which applies only to the reimbursement of
management fees) applicable to the Fund is 2 1/2% of the
average net asset value up to $30,000,000, 2% of the average
net asset value of the next $70,000,000, and 1 1/2% of the
average net asset value in excess of $100,000,000.
3. Related Parties -
As of October 31, 1996, liabilities of the Fund included
accrued operating expenses of $4,974 payable to Perritt
Capital Management, Inc.
4. Sources of Net Assets -
As of October 31, 1996, the sources of net assets were as
follows:
Fund shares issued and outstanding.......... $5,846,763
Unrealized appreciation of investments...... 1,644,032
Accumulated net realized gain on investments 961,764
Undistributed net investment loss........... (322,972)
-----------
Total....................................... $8,129,587
===========
Aggregate net unrealized appreciation as of October 31, 1996
consisted of the following:
Aggregate gross unrealized appreciation..... 2,131,398
Aggregate gross unrealized depreciation..... (487,366)
-----------
Net unrealized appreciation................. $1,644,032
===========
As of October 31, 1996, there were 20,000,000 shares of $0.01
par value capital stock authorized.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS:
To the Shareholders and Board of Directors of the Perritt Capital
Growth Fund, Inc.:
We have audited the accompanying statement of net assets of the
Perritt Capital Growth Fund, Inc. (a Maryland corporation) as of
October 31, 1996, the related statement of operations for the year
then ended, the statements of changes in net assets for each of the
two years in the period then ended and the financial highlights for
each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities
owned as of October 31, 1996 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of the Perritt Capital Growth Fund, Inc. as of
October 31, 1996, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in
the period then ended and the financial highlights for each of the
five years in the period then ended in conformity with generally
accepted accounting principles.
CHECKERS, SIMON & ROSNER LLP
Chicago, Illinois
December 27, 1996
